Eurozone economy stumbles raising fears of new year recession

The eurozone economy stumbled in November, according to a closely watched survey which has raised fears that falling demand from Russia and China will plunge the currency area into renewed recession in the new year.

The euro tumbled to a 27-month low against the dollar after Markit’s composite purchasing managers’ index (PMI) for November, based on surveys of thousands of companies across the region and seen as a good indicator of growth, sank to 51.1 from October’s 52.1 – its lowest reading for 16 months.

The new business sub-index fell below the 50 mark that separates growth from contraction for the first time since the middle of last year, dropping to 49.7 from 50.8 and suggesting a further downturn in December.

Chris Williamson, chief economist at financial data provider Markit, said: “The region is on course to see a mere 0.1% GDP growth in the final quarter of the year, with a strong likelihood of the near-stagnation turning to renewed contraction in the new year unless demand shows signs of reviving.”

The PMI covering the region’s dominant service industry fell to 51.1 from October’s 52.3, less than the earlier flash estimate of 51.3, and showed firms have been cutting prices for three full years now to drum up business. The output price index came in at 47.1.

The European central bank (ECB) is increasingly concerned about the persistent price cutting. Annual inflation dipped to 0.3% in November, far below the central bank’s 2% target and deep into what the ECB’s president, Mario Draghi, has termed the “danger zone” for price moves. The central bank is not however expected to alter its already loose policy when it meets on Thursday.

The ECB has already taken steps to expand the supply of credit in an effort to drive down borrowing costs and ease pressure on household budgets. In the summer the policy appeared to be stimulating investment and demand, especially in the worst-hit countries of Spain, Ireland and Greece.

However, the crisis in Ukraine and the slowing Chinese economy have undermined confidence and hit German exports, dragging the eurozone back closer to recession.

Andrew Bosomworth, a senior director at bond fund manager Pimco, said he expected Draghi to authorise Bank of England-style quantitative easing (QE) in the new year to combat the potential for a return to recession.

“We expect these policies to increase the balance sheet from €2tn today to €2.3tn–€2.6tn by the end of 2015, after netting off other assets maturing in the course of next year,” he said.

But the impact will quickly run out of steam before the end of the year without backing from eurozone governments.

“Fiscal, structural and monetary policies need to work in unison. Financial markets are likely to endorse larger fiscal deficits if they are underwriting growth-enhancing reforms and productivity-enhancing investment,” he said.

QE has been resisted by Germany, which has objected to the ECB buying government bonds. The German PMI was 51.7, its lowest for 17 months. Activity in France contracted at its fastest pace for nine months with the reading dropping to 47.9.

Williamson at Markit said: “Survey results indicate that policy initiatives currently announced have yet to have a meaningful impact on business or consumer confidence in the region, and that more aggressive measures are likely to be needed, and quickly implemented, if another recession is to be averted.”

Some analysts believe that low oil prices will come to the rescue of many major economies, including those inside the eurozone, without the need for further central bank funds.

The price of Brent Crude has fallen 40% since the summer and should remain below $70 a barrel after the oil cartel Opec agreed to maintain output at current levels.

In the short term, declining oil prices have helped depress inflation, but in a period of low earnings growth lower operating costs for businesses and households could provide a boost to demand and growth.